Auction companies have used the surge of distressed asset sales to gain a foothold in the commercial real estate investment sales market. The question remains as to whether or not auctions can make a bigger push into the traditional sales arena.
The surge of distressed sales has brought more attention and interest to the auction platform as a viable means for selling and buying properties. “There are certainly more investors who are buying and selling through auction today than even three years ago. It has just become much more widely accepted,” says Stephen Karbelk, co-chairman and founder of AmeriBid LLC in Reston, Va.
Auction companies are doing a robust business. Auction.com alone, which is the leading online real estate marketplace, sold $3.6 billion in commercial real estate in 2012 and is continuing to work an active pipeline in 2013. Last week, Auction.com successfully auctioned 49 commercial properties across 24 states for more than $133 million. Auction.com has another four large auctions coming up in June and July, including one at the end of July that is expected to produce between $350 million and $400 million in total sales.
Distressed property sales have been a stable to the real estate auction business. Even though distress is showing signs of declining, there is still an ample supply of distressed commercial real estate assets that needs to work its way through the system. An estimated $158 billion in distressed assets remain in the pipeline, including $51 million worth of REO properties, according to data from New York-based Real Capital Analytics. That volume represents about 40 percent of the total $399 billion of commercial mortgages that became troubled over the past cycle.
Competition for that auction business has firms trying to find new ways to grow their business as the market for distressed sales starts to shrink. For some firms, that has meant expanding geographically. Last week, AmeriBid launched its new division, AmeriBid Caribbean, which will be based in San Juan, Puerto Rico. According to Karbelk, Puerto Rico has an estimated $2 billion in non-performing loans. AmeriBid Caribbean is planning to host its first auction in September that is expected to include 100 to 150 properties in Puerto Rico. Other auction companies are hoping to grow by expanding into market rate or non-distressed property sales transactions.
Grabbing more market share
Auctions have long been used to command top prices on items such as art, wine and cars. The biggest stumbling block for commercial real estate auctions to move into more mainstream sales is that it is perceived as a vehicle that is only used as a way to dispose of distressed real estate sales. “There are some preconceived notions that auction is for distress only, and we fight that battle daily,” says Eric Paulsen, president of the commercial division for Irvine, Calif.-based Auction.com.
Auction.com’s commercial division has largely been focused on working with distressed assets being sold by banks, lenders, special servicers and other motivated sellers. In 2012, the company began expanding its business development efforts to reach more institutional real estate owners. “That is really going to be the success story as we evolve from a distressed market,” says Paulsen.
For example, Auction.com has sold assets for large owners such as Blackstone, General Growth Properties, Kimco Realty, Gramercy Property Trust and GE Capital. “So, we are getting more and more mainstream institutions comfortable with the process,” says Paulsen.
One of the biggest hurdles will be ridding the niche of the stigma that it is a vehicle only for distressed sales. Certainly, the majority of auctions have focused on distressed situations whether that is due to a distressed asset, a distressed seller or a distressed market. “We have not really seen the auction of core-quality, stabilized properties that don’t have a lender involved,” says David Nachison, a senior managing director at HFF in Washington, D.C.
Changing perceptions
There is a perception that auctions will be more opportunistic, perhaps because there are fewer people bidding or bidding less aggressively. Yet that is not always the case. Some auctions, particularly for institutional-quality assets in top markets have ended up commanding good pricing, even market pricing in some cases, notes Nachison.
HFF has conducted both live and online auctions. For example, one of the first auctions HFF did was a live auction for The Palatine apartments in Arlington, Va. in 2010. The 262-unit class-A apartment property sold in a live foreclosure auction for $118 million or $450,382 per unit. That particular deal attracted 10 qualified bidders–each of whom showed up with a certified check for $9 million in order to register. “The key to successful auctions, whether live or online, is to gain confidence to bid from the most aggressive buyers for an asset,” says Nachison.
There are examples where high quality, even trophy assets are selling at auction. AmeriBid sold a land parcel last year for $28.7 million at auction that was the highest priced third party foreclosure sale in Maryland in 2012. “Even very valuable properties can sell for top dollar at auction,” says Karbelk.
Today, auctions are occurring live, online and a combination of the two in a “hybrid” format. Yet it is the technology that has opened up new opportunities to grow this niche as an alternative to the traditional sales model, notes Paulsen. Auctions used to be outcry. So the bidder used to have to physically show up to wave their hand. Those local auctions used to have a more limited reach in terms of their marketing to attract potential bidders, such as an ad in the local paper.
The Internet creates a much bigger audience for those sales. Because of the technology that is in place today, Auction.com has had people bidding on auction properties from their home or business, as well as cruise ships and baseball games. “Technology has allowed us to expand the buyer universe for properties, which benefits the seller,” says Paulsen.
